The financial statements of Eagle Sport Supply are shown in the below table. For
ID: 2771948 • Letter: T
Question
The financial statements of Eagle Sport Supply are shown in the below table. For simplicity, "Cost" include interest. Assume that Eagle's assets are proportional to its sales. Assume a growth rate of 30%.
Income Statement
Sales
$2,750
Costs
1,150
Pretax income
1,600
Taxes ( at 30% )
480
Net income
$1,120
Balance Sheet, year-End
2014
2013
2014
2013
Assets
$4,,800
$4,500
Debt
$1,900
$1,800
Equity
2,900
2,700
Total
$4,800
$4,500
Total
$4,800
$4,500
a. Assume that the dividend payout ratio is fixed at 50% and the equity-to-asset ratio is fixed at two-thirds. What is the internal growth rate of Eagle Sport?
Internal growth rate
b. What is the sustainable growth rate? (round answer 2 decimal places)
Sustainable growth rate
Income Statement
Sales
$2,750
Costs
1,150
Pretax income
1,600
Taxes ( at 30% )
480
Net income
$1,120
Explanation / Answer
Sustainable growth rate = Retention ratio * Return on equity
= ( 1- Dividend payout ratio) * Return on equity
Return on equity = Earnings available for shareholders/ Average shareholders funds
= 1120/2800 i.e 40%
Sustainable Growth Rate = (1-0.50)*0.40 i.e 20%
Internal growth rate = Return on assets *Retention ratio/1-(Return on assets * Retention Ratio)
Return on assets = Net income / Average total assets
= 1120/4650 i.e 24.08%
Internal growth rate = 0.2408*0.50/1-(0.2408*0.50)
= 0.1204/0.8796
= 13.68%
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